Clergy Tax

How about Social Security and Medicare taxes? Is the church required to match the FICA tax?

A clergy's tax situation is unique and as church administrators residing in the United States, it is imperative that we know the IRS's tax laws regarding minister or clergy taxes before we write that first paycheck.

But first and foremost.....

Clergy Tax Factor 1: Determining who is a minister for tax purposes

• Be licensed or ordained
• Administer the sacraments of the church (weddings, funerals, baptisms, and communion, etc...)
• Be considered a religious leader by the church
• Conduct religious worship
• Have management responsibilities in the church

The Pastor is almost always considered a clergy for tax purposes.

Clergy Tax Factor 2: What special tax treatment do clergy receive?

Clergy receive special tax treatment for the following three topics:

• Ministers pay their own self-employment tax.(Even though ministers can be considered church employees, they are treated as self-employed for Social Security and Medicare tax purposes.
• Ministers can receive a Housing Allowance and/or live in a church provided parsonage. (The value of both of these are excluded from a minister's calculation of income tax...but still subject to self-employment tax)
• Churches cannot withhold Social Security and Medicare tax from a minister's paycheck.

Clergy Tax Factor 3: Self-employment tax

Unlike non-minister employees, the church cannot withhold half of the Social Security and Medicare tax from a minister employee’s paycheck and does not have to match any FICA tax as none is held out.

Instead, a minister employee is responsible for paying his own self-employment tax. As a result, the minister employee actually pays twice as much Social Security and Medicare as a non-minister employee.

In most circumstances the amount of the minister’s income that is subject to the self-employment tax includes the base salary, the housing allowance, and the fair rental value of church provided housing, if any.

An example of what a minister could expect to pay in self-employment tax :

Clergy Tax Factor 4: Can a clergy opt out of social security?

Yes. But he must do it by the second year in which he earned more than $400 of ministerial income. IRS Form 4361 must be used and it must be filed on the correct basis of religious belief. If approved by the IRS, only earnings from ministerial services are exempt from self-employment tax. Form 4361 indicates that once the exemption is approved, you cannot revoke it.

Clergy Tax Factor 5: Can a church withhold tax for the clergy?

Yes. The church can withhold income tax, but not Social Security and Medicare tax.

A minister is responsible for paying the Social Security and Medicare tax himself. He can pay this tax by making quarterly estimated tax payment, or by requesting the church to hold out extra income tax.

The minister who is considered a church employee must complete a form W-4 and request that a specific amount be withheld from each paycheck.

For example, if a minister estimates that his combined income and self-employment tax for the year will be $9600. He can request that the church withhold $800 of income tax from each month's paycheck.

Even though the minister can only elect withholding of income taxes, he can use these tax payments against both income and self-employment tax since they are added together on his personal income tax return (Form 1040).

*Important: You cannot withhold taxes from ministers' pay without the minister's authorization. Ministers are exempt from income tax withholding whether they report their income taxes as employees or self-employed; ministers who report their income taxes as an employee can request voluntary withholding by submitting a Form W-4 to the church.

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Additional Resources

This article will answer the question about whether you issue a W-2 or 1099MISC to your ministers. "You Be The Judge: Payroll Tax Mistakes"

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